Factories Scaling Back Amid Economic Slide

In what could be a troubling sign for the U.S. economy, manufacturing activity started contracting last month. U.S. manufacturing has been a much-needed bright spot, with companies adding jobs and selling more products.

But today, as NPR's Chris Arnold tells us, we got evidence that things might be changing.

CHRIS ARNOLD, BYLINE: This so-called ISM Index showed that manufacturing has been shrinking for the first time in three years. That definitely doesn't sound good. Brian Bethune is an economist with Gordon College in Massachusetts.

BRIAN BETHUNE: Clearly, the weakness that we saw in manufacturing in June is somewhat of a disappointment.

ARNOLD: Still, when you dig into the numbers, the overall index this time around was dragged down mostly by just one subcategory: new orders for manufacturing fell very sharply. In fact, orders haven't dropped off this much since all the way back in 2001, right after the September 11th attacks. Back then, many companies, of course, put a lot of projects on hold. But why would they be holding back so much right now?

Brad Holcomb heads up the survey.

BRAD HOLCOMB: You know, I've been asked that all day long. And I don't think I can point to anything in particular at all.

ARNOLD: There is speculation that the ongoing trouble in Europe could be part of the problem. But Holcomb says in other parts of this month's survey there are also positive signs. Most manufacturers, for example, they say they are still adding jobs.

HOLCOMB: They're still hiring. And another piece of good news is that the prices index dropped 10.5 points.

ARNOLD: That means for the second month in a row, manufacturers say that they're getting a break from the falling cost of more raw materials, basically it's cheaper for them to make stuff.

Meanwhile, in the broader economy, some sectors, such as construction, are actually doing better. Other indicators like consumer confidence look shakier. And overall, most economists are forecasting more of the same, an ongoing economic recovery but a very slow.